Defense industry bellwether Lockheed Martin (NYSE:LMT) recently reported financial results to indicate that top line growth trends remain weak, but that it has the operational discipline to contain costs and grow earnings in the face of difficult industry conditions.

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Full-Year Recap
Sales eked out 1.8% growth to $46.5 billion. Lockheed's two largest divisions were able to post positive growth for the year, but its two smaller units did not. Specifically, aeronautics grew nearly 10% to account for almost 31% of total sales on strong trends in the F-35 LRIP fighter program and higher volumes in both the C-130 Hercules and C-5 Galaxy airlift aircraft programs.

The F-35 continues to have huge potential for Lockheed and partners, including Northrop Grumman Corporation (NYSE:NOC) and Honeywell (NYSE:HON), with thousands of orders anticipated from the U.S. and its allies. Electronic systems posted very modest 1.5% growth to weigh in at just over 31% of sales. Higher air defense program sales were cited, as well as combat ship programs. The two remaining units, information systems and space systems, reported sales declines of 5.4% and 1.3%, respectively, to account for the rest of sales.

Every unit posted positive, albeit modest operating profit gains. Total divisional operating profit advanced 5% to $5.3 billion, but backing out corporate expenses resulted in a total company operating profit decline of 1.7% to $4 billion. Higher taxes contributed in sending net income down 7.8% to $2.7 billion, though share buybacks were able to help keep earnings flat at $7.81 per diluted share. Operating cash flow growth was even stronger at 11.9%, growing to $4.3 billion. For the year, Lockheed contributed $2.3 billion to shore up its pension plan. (To know more about income statements, read Understanding The Income Statement.)

For the coming year, Lockheed expects a slight decline in sales to between $45 billion and $46 billion. It also expects a similar level of earnings, in a range of $7.70 to $7.90 per diluted share. Operating cash flow will fall to $3.8 billion, though this also includes contributing $1.1 billion to the company pension plan.

The Bottom Line
From a growth perspective, Lockheed has been an unappealing investment. Over the past five years, the stock is down roughly 15% to lag the overall market and its peers, including Northrop Grumman and Raytheon (NYSE:RTN). Sales growth is also projected to be flat for at least the next two years.

However, over the past half decade Lockheed has been able to leverage average annual sales growth of only about 4% into double-digit annual profit gains. And earnings are projected to reach $8.42 by the end of 2013 as management controls costs and repurchases shares to keep the bottom line moving forward. And while Lockheed's share price performance has been weak as of late, it has still outperformed rivals including Boeing (NYSE:BA) and L-3 Communications (NYSE:LLL).

Finally, the current dividend yield of 4.9% is as high as you'll find in the defense industry. Combined with a forward P/E of only about 10.5, the low valuation suggests downside is limited and that investors can get paid to wait for Lockheed and the rest of the industry to make it through a period of defense spending cutbacks across the globe. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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